eBusiness Weekly
Tawanda Musarurwa
Institutional investors such as pension funds have long piled into real estate investment as a way to hedge their funds against inflation in the long-term.
But property investments are typically illiquid assets, that is, they cannot be easily sold or exchanged for cash without a substantial loss in value.
In a research note earlier this year, John Legat of market analysts Imara Asset Management, said real estate holders trying to sell such assets could incur huge losses.
“Property is likely totally illiquid in this environment without significant write downs being incurred to force sales through,” he said.
This is a particular problem in the local environment where pension funds are heavily invested in property and equities, with liquidity levels on the Zimbabwe Stock Exchange (ZSE) currently subpar.
The liquidity challenges being faced by local pension funds have been exacerbated by the underperformance of the money market as well as prescribed assets such as Treasury Bills (TBs) that would normally be very liquid assets.
However, the recent move to add Real Estate Investment Trusts (REITs) to the local capital markets will allow institutional investors such as pension funds to issue property derivatives that can improve their cashflows.
The introduction of REITs can also allow these funds exposure to a specific real estate market without having to buy and sell tangible properties in a difficult market.
Finance and Economic Development Minister Mthuli Ncube this week said Treasury had exempted REITs from income tax to further incentivise pension funds to issue property derivatives.
“I removed the income tax from Real Estate Investment Trusts. The problem we have been having is that if you look at their portfolios, our pension funds have huge exposure to the property sector.
“And what happens is that if rental income drops in the property sector, that section of the portfolio then becomes illiquid,” he said
“At the same time the pension funds that are facing liquidity challenges, are receiving pressure from pensioners who want to be paid every month,” said the Finance Minister.
“So what you do then is that you cause that property portfolio to be liquid by issuing instruments whose value is backed by that portion of property, and these are the REITs.
“When these are traded it unlocks liquidity for the pension funds to meet pension demands. That’s why we did what we did in terms of REITs, and we hope that those in the sector will launch these instruments.”
According to Risk and Investment Management Consulting Actuaries (RIMCA) director Gandy Gandidzanwa, the United States dollar-denominated bourse, the Victoria Falls Stock Exchange (VFEX) is an ideal platform for such property derivatives.
“Pension funds can take advantage of the newly established Victoria Falls Stock Exchange by listing their property holding as a property fund,” he said.
“They need not float all of it, say 40 percent maximum.
“This generates immediate liquidity in the fund, and is also a potential source for offshore investment.”
The launch of the REITs could not have come at a more opportune time as the Covid-19 has worsened prospects in the local property sector.
Zimbabwe Association of Pension Funds (ZAPF) director-general Sandra Musevenzo, recently highlighted these concerns.
“Given that the pensions industry controls a significant portion of Zimbabwe’s commercial real estate, the impact of the lockdown on tenants’ businesses is set to have an adverse effect on rental income streams and spike the level of voids in properties in the short-to-medium term,” she said.
“Already tenants are seeking rent free periods and major rent discounts.”
The introduction of REITs is part of a wider initiative by the sector regulator, the Insurance and Pensions Commission (IPEC) in conjunction with the Securities and Exchange Commission of Zimbabwe (SECZ) for the issuance of sector-specific derivatives and other instruments.
Also this week, diversified insurer Old Mutual Zimbabwe launched the Old Mutual Zimbabwe Stock Exchange Top Ten Index Exchange Traded Fund (ETF) on the local bourse, which will boost the country’s capital market offerings.
